Being held to account for exploitation: The personal liability of directors for inducing a breach of employment contract
The decision of the English High Court in the case of Antuzis and others v DJ Houghton Catching Services Ltd and others caught the attention of the English press with the Judge describing employment conditions the claimants worked under as a “gruelling and exploitative work regime”, and the press labelling the conditions as “modern slavery”.
The claimants were migrants from Lithuania employed by the defendant company as chicken catchers, which meant they travelled from farm to farm catching chickens for slaughter. The claimants gave evidence of their working conditions which included: deductions from pay as an employment fee; high deductions from pay for accommodation; no breaks, holiday pay or pay for all the hours worked; deductions from pay as punishment, and sometimes no pay for weeks at a time; no provision of protective clothing; and physical and mental abuse by “enforcers”.
The employer company had prior form for poor working conditions and had previously agreed to pay £1 million in 2016 to settle similar claims. By the time of this case the employer no longer had significant assets. As a result, the question in this case was whether the director, who was the sole beneficial owner of the employer company, and the company secretary, could be held personally liable for inducing the breaches of the claimants’ employment contracts by the employer company.
Directors have long been held personally liable for the torts, or wrongful acts, of a company committed at their direction. However, the position is different where the directors induce a breach of contract. In this respect, the general principle (the Said v Butt principle) is that a director will not be personally liable for inducing a breach of contract by the company if he is “acting bona fide within the scope of his authority”. In these circumstances the director’s actions are held to be the acts of the company and not their own. Could the director and company secretary in this case be held to account?
The Judge found on the evidence that:
- no records were kept of the claimants’ actual working hours for which they should be paid as the director and company secretary had a “flagrant disrespect” for the relevant statutory provisions;
- there was complete disregard for entitlement to overtime;
- there was a systematic process of withholding money as employment or work finding fees;
- accommodation fees were deducted at a rate which was not lawful. The claimants also gave evidence that they were regularly only allowed to sleep upright in minibus seats while travelling between farms;
- wages were withheld as a form of punishment. The statutory investigator during its investigation in to the company said this was a way “to trap workers and leave them little or no option but to remain…in the hope they would receive pay in the future”;
- the claimants were not provided with or ever told about the entitlement to holiday pay;
- both the director and company secretary were a “thoroughly unsatisfactory witness” with the director described as “someone who is prepared to say anything at all which he thinks might serve his purpose.”
Could the Director and company secretary be held personally liable?
The Said v Butt principle that a director will not be personally liable for inducing a breach of contract by the company if he is “acting bona fide within the scope of his authority” has been consistently applied in the United Kingdom, Australia and Canada.
The Judge considered what acting “bona fide” means in this context and concluded that it is the director’s conduct and intention in relation to his duties toward the company – not towards the third party – that provides the focus of the “bona fide” enquiry. However, the nature of the breach of contract is still relevant as it informs whether the director has breached his or her duties towards the company.
With regard to the duties owed, the Judge referenced Section 172 of the UK Companies Act 2006 which imposes a duty on directors to act in good faith so as to promote the success of the company with regard to:
- the likely consequences of any decisions in the long term;
- the interests of the company’s employees;
- the impact of the company’s operations on the community; and
- the desirability of the company maintaining a reputation for high standards of business conduct.
Section 174 of the UK Companies Act 2006 further imposes a duty to exercise reasonable care, skill and diligence. The Irish Companies Act 2014, at section 228, contains similar provisions to those contained at sections 172 and 174 of the UK Companies Act 2006.
The Judge also commented there can be a substantial difference between the types of breach of contract induced by a director. For example, a director causing a company to breach its contract with a supplier because the company has encountered short-term cash flow difficulties is vastly different to the actions of a director of a company who decides the company should supply customers with horse meat rather than beef, as it is cheaper. In the second scenario, the resulting scandal would inflict severe reputational damage on the company from which it might take years to recover from, if it did at all.
Considering the Said v Butt principle the Judge confirmed that both the director and company secretary were acting within the scope of their authority in terms of the company’s articles, the issue was whether they had been acting bona fide in relation to their duties towards the employer company.
The Judge held that both the director and company secretary knew that they were unable as a matter of law to act in the way they had towards the claimants on behalf of the employer company, not least as they had been inspected twice by the statutory investigator. Furthermore, the Judge held the director and company secretary acted as they had to maximise profits which they, and only they, enjoyed, and this had catastrophic consequences for the employer company once the malpractices came to light. Their actions were in breach of sections 172 and 174 of the UK Companies Act 2006, were manifestly not in the interests of the company’s employees, and had severely damaged the company’s reputation in the eyes of the community.
Consequently, the director and company secretary were each held jointly and severally liable to the claimants for inducing the breaches of their employment contracts by the employer company. Summary judgment was entered against them and damages will be determined at a subsequent hearing.
Directors will be personally liable in damages for inducing a breach of contract where they have not acted within their authority, and in accordance with the duties they owe to the company of which they are an officer.
This makes both legal and practical sense. Why should directors be protected by a corporate veil where their actions are directly contrary to the interests of the company?
In this case, it would be hard to disagree that it was appropriate that the director and company secretary would be required to financially account for the employment conditions the claimants had to endure.